Annuities

Distribution and Disappearance


Annuities

Annuity sales are shifting, and the direction is concerning.

 

At a recent industry event, where annuity sales executives came together to learn and share with each other, we went over a lot of statistics. One chart in particular was alarming.1

 

Annuity-Sales.jpg

 

Between 2015 and 2017, the annuity industry shrank by $29.3 billion in overall sales. The shocking part is that income annuity sales lost more than $34 billion. Some of that loss may have been due to many variable annuity carriers not issuing living income benefit riders, as rich as those riders were earlier in the decade. However, we’re still in the baby boom retirement era – the same 10,000 people per day transitioned from the workforce to retirement during that time.2

 

I have to ask …

  •         Have we forgotten the value of guaranteed income?
  •         Is the accumulation sale just easier for us to move assets?
  •         Why do we not sell the benefits of mortality credits on a regular basis?

 

The troubling part is that a corresponding influx of other income-producing assets does not exist. When I spoke with the research firm, they had no explanation where these assets have gone.

 

When looking at opportunities, I look to where the pendulum is likely to swing next. We have the largest transition from the workplace happening while life expectancies continue to grow. There has never been a greater need for guaranteed income that can’t be stopped until the retiree passes away. There has never been a better time to get ahead of the pendulum – talk to clients about the benefits of income riders and income annuities.

 

Winning Strategy

Fill a gap for your clients. Talk to them about the overall benefits of using guaranteed income products in their retirement portfolio. Statistics tell us that the competition isn’t talking about them.

Winning Strategies

Craving More?

In this episode, Mike McGlothlin shares not one, but five Winning Strategies to create a tax-efficient retirement portfolio. These strategies will set you apart from the competition by adding value to your clients.

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1Source: LIIMRA Secure Retirement Institute, U.S. Individual Annuities survey, VA GLB Election tracking survey and Indexed GLWB Election Tracking survey; analysis is of retail individual annuity market and excludes employer plan and structured settlements.

2Pew Research Center, “Baby Boomers Approach 65 – Glumly,” December 2010: http://pewrsr.ch/T4o2Hs

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Retirement Annuities Guaranteed Income

The Value of Tax Planning for Retirement


Annuities

When I look at our industry today, I see a lot of commoditization. Our clients are driving transparency and asking for lower fees with more service. This combination makes it difficult to sustain a healthy business model, whether you’re commission-based or advisory-based.

 

Asset allocation and rebalancing can be done online, which has driven down value in the eyes of the consumer. Now, you may provide exceptional service and other planning around asset allocation to add value, but the value of asset allocation has been driven downward.

 

What is the key to driving value and making sure that you can earn a sustainable revenue stream? Generally, you need to lead the pack for those services and products that consumers find the most valuable. Keep in mind that price is a dollar amount. Value is how the client perceives it in their own eyes.

 

Prioritize Your Focus

Understanding today’s retirees and developing strategies to deliver value in a few critical areas allows you to build a long-term, sustainable business model. A 2017 poll uncovered some of Americans’ greatest fears about retirement: 1

 

  • 71 percent worry about health care costs. Government health plans are means tested and based on Modified Adjusted Gross Income levels. It’s important to have a strategy for keeping costs at a minimum through proper taxable income planning.
  • 52 percent worry about future tax rates. Even with the Tax Cuts and Jobs Act, marginal tax brackets did not drop significantly. With Social Security and Medicare struggling financially past 2035, it’s easy to see a potential increase in taxes – payroll, FICA and income tax rates.
  • 81 percent worry about running out of money and having to go back into the workforce. Guaranteed income could help alleviate that pressure.

 

These three areas of service – health care, tax planning and guaranteed income – can provide significant lift for your business over the next few years. They are highly valued in the consumer’s eyes.

 

According to a report from Capital Sigma, comprehensive financial planning, which would include retirement income planning and health care planning, is valued at more than 50 additional basis points. Tax management is perceived to be 100 basis points in value to the consumer. Those two services are valued at 150 basis points, whereas asset allocation is perceived to have a value of just 28 basis points.2

 

To increase the value of your business and drive revenue through your firm, you need to meet the changing demands of the American population. People will always pay for value.

 

Winning Strategy

Think about what your clients want more and design your firm and practice around those ideas.

Winning Strategies

Craving More?

In this episode, Mike McGlothlin shares not one, but five Winning Strategies to create a tax-efficient retirement portfolio. These strategies will set you apart from the competition by adding value to your clients.

Watch Now

 

1American Institute of CPAs (AICPA) / Harris Poll, March 2017

2Capital Sigma: The Sources of Advisor-Created Value, 2016: https://www.envestnet.com/sites/default/files/documents/ENV-WP-CS-0516-FullVersion.pdf

 

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Retirement Tax Planning Health Care Guaranteed Income

TLC: Taxation, Longevity and Control


Annuities

Health care might be one of the most expensive risks in retirement. Today, and most likely to continue for the foreseeable future, government health care premiums are based on means testing based on income levels. It’s important to understand the components of the income calculations. And, it’s equally important to determine how to control that income.

 

In general, less taxable income translates to less health care premium. The goal for the retiree should not be to lower taxes, but increase net income. Net income can be positively affected by reducing taxes, lowering premiums and other costs, and increasing the gross income to the client. Let’s look at some techniques that can add control to the financial plan that might also increase the net after-tax income to your client.

 

Asset Location Vs. Allocation

Many people tell me that purchasing a single-premium immediate annuity (SPIA) in today’s low interest rate environment is one of the worst decisions they could recommend. However, I think a SPIA can be the most effective tool in raising after-tax income for our clients. With today’s interest rates, a nonqualified SPIA can provide a high exclusion ratio for every payment received. This excluded amount is a non-taxable event and does not go into the calculations against Social Security taxation and health care means testing. 

 

Housing Wealth

In the United States today,there is as much housing wealth as the industry has in assets under management. The use of housing wealth might be the most underutilized strategy for any retiree. We ran simulations using housing wealth as a noncorrelated investment strategy during retirement. Every year that the markets ended down, the home equity was used to generate the income needed instead of the investment portfolio. This provided some time for the investment portfolio to recover.

 

With a traditional systematic withdrawal strategy and no noncorrelated assets, the portfolio failed at age 95 in 26 percent of the simulations. The client would run out of income in more than one out of four situations. By using a withdrawal from the noncorrelated asset (home equity conversion mortgage), the failure rate dropped to just 2 percent. We decreased the risk of failure from one in four to one in 50. That’s a significant change in confidence for the American retiree.

 

Other Noncorrelated Assets

Noncorrelated assets don’t have to be just housing wealth. Fixed annuities with liquidity, cash and permanent life insurance are all noncorrelated assets. Life insurance and housing wealth provide access to these funds on a tax-free basis. Noncorrelated assets can be a great tool to control the tax on the retiree’s income and create flexibility of when to pay the tax based on the source of the income.

 

Winning Strategy

Instead of looking at rates of return, look at your client’s net after-tax income as a benchmark for performance. Look for solutions to increase gross income while managing taxes and expenses to increase the funds available for the retiree to spend. 

Retirement Webinar

Craving More?

Professor Jamie Hopkins joins us to explain how the tax reform bill impacts retirement income tax planning, focusing on tax efficiency.

Catch the Replay Here

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Retirement Taxes Health Care Home Equity Conversion Mortgage

Unintended Consequences and an Underutilized Solution


Annuities

Whenever there is a significant change in the tax code, there are always unintended consequences. The Tax Cut and Jobs Act (TCJA) is no exception. While many people thought the new tax law created simplification and reduced corporate taxes, it might also create a dramatic and negative affect on charities.

 

A few reasons why:

  • The TCJA increased the standard deduction to $12,000 for singles and $24,000 for couples
  • Tax brackets were lowered, making all deductions less valuable
  • The federal estate exemption was raised to $22 million for couples, making charitable bequests less urgent for wealthy households

 

The Tax Policy Center estimates that the share of middle-income households claiming the charitable deduction will fall by two-thirds, from 17 percent to just 5.5 percent. Even larger incomes will see a significant drop of nearly 25 percent.1

 

Obviously, those households that are charitably inclined will continue to support their favorite charities. However, many Americans are motivated to make donations based on financial advantages. I want to point out that there are great opportunities to continue making charitable contributions that can impact the tax control of a retiree’s income – one such technique is the use of Qualified Charitable Distributions (QCDs).

 

Help Clients Give

QCDs allow for required minimum distributions up to $100,000 to be directed to a charity directly from the plan participant’s IRA. The distribution does not count as income – that’s a really important distinction. A deduction, most likely, would be taken off adjusted gross income with some limits. A QCD simply does not count as income.

 

This strategy creates cascading benefits – some key ones include:

  • The client can make a charitable deduction even if their contribution is under the standard deduction
  • QCDs do not increase combined income for Social Security taxation calculations
  • QCDs do not increase the Modified Adjusted Income for Medicare premium thresholds
  • The lower income may allow a client to “bracket bump” and convert other qualified funds in a lower tax bracket

 

The use of QCDs hasn’t been popular recently, but I can’t pinpoint why. Many planners haven’t used this strategy because the client was able to take a deduction above and beyond the standard deduction. Now, tax laws have changed, making it more difficult to make a charitable contribution the “traditional” way.

 

Winning Strategy

The tax law change should make you think and act differently. Talk to clients who are taking RMDs about changing their contribution to Qualified Charitable Distributions.

Retirement Webinar

Craving More?

Professor Jamie Hopkins joins us to explain how the tax reform bill impacts retirement income tax planning, focusing on tax efficiency.

Catch the Replay Here

 

1Tax Policy Center, TaxVox, “21 Million Taxpayers Will Stop Taking the Charitable Deduction Under The TCJA,” January 2018: https://www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Retirement Taxes Charitable Planning Qualified Charitable Distributions

Two Birds, One Stone: A Strategy to Retain Assets and Find New Clients


Annuities

The Tax Cut and Jobs Act made great strides in transferring wealth by increasing the federal estate tax exemption to $11.2 million per person. The problem is many Americans no longer feel the need to complete estate planning. That’s incorrect thinking.

 

One of the costliest taxes at death is the income tax on the transfer of nonqualified annuities. This will likely come as a surprise to many beneficiaries as most planners have not addressed the issue. You can address it by giving your clients and their beneficiaries more control.

 

One Rider, Several Advantages

One of the more innovative income riders has received a private letter ruling that provides great tax benefits. The income that is generated to the current owner/annuitant receives an exclusion ratio. All other income riders are taxed as last in, first out (LIFO).

 

This tax advantage allows the client to be more intentional about the source of retirement income. The use of an exclusion ratio might boost net after-tax income to the client while taking pressure off the assets under management to perform. For clients using taxable certificate of deposit interest as income, this maneuver can make a significant increase in gross and net income.

 

More importantly, the rider allows the beneficiary control over how they receive the transfer at the death of the owner/annuitant. The beneficiary can “harvest” the cost basis in the nonqualified contract through a lump-sum distribution or by continuing the monthly income. I like to think of this strategy as putting the tax man at the back of the line instead in the front of the line.

 

This strategy creates several advantages:

  • You’ve increased the overall income to the client with the income rider
  • The client enjoys more of the income since more of the income is received tax free in the form of a return of cost basis
  • The beneficiary has choice and control of when to get taxed on the remaining gain in the annuity

 

If you provide that level of value to your clients and their beneficiaries, you are in a great position to retain those funds through the next generation. That’s the best way to retain assets and attract new clients.

 

Winning Strategy

Think about getting your clients in a better position to harvest the cost basis on their nonqualified annuities during the transfer process. It can help the client now and the beneficiary later.

Retirement Webinar

Craving More?

Professor Jamie Hopkins joins us to explain how the tax reform bill impacts retirement income tax planning, focusing on tax efficiency.

Catch the Replay Here

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Retirement Taxes Wealth Transfer